Make the Tax Credit Extension Work for You

How would you like a bonus in your paycheck this year? Several provisions in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 may impact your net pay—for the better.

• A temporary 2 percent reduction in the employee portion of Social Security tax—or FICA (Federal Insurance Contributions Act) payroll tax—from the current 6.2 percent to 4.2 percent for one year.
• A two-year extension of all current tax rates, with the exception of the Making Work Pay Tax Credit provision, which was dropped in favor of a one-year, 2-percent reduction in employee Social Security payroll tax noted above.

1. Build up an emergency fund. Tuck that extra money away into savings. Even a modest amount—as little as $500—can help soften the blow of typical unexpected expenses. If you already have an emergency fund, give yourself an extra boost toward reaching that three-to-six-month-living-expenses recommendation. If you have yet to establish a plan, learn how you can maximize your savings.
    
2. Pay down credit card debt. Is high-interest credit card debt weighing you down? Use your extra money each month to make higher payments toward that alarming balance. First, attack the card with the highest interest rate. If you can pay off the card in full, that’s even better. More tips on dealing with debt.
    
3. Avoid the holiday shopping hangover in 2011. Use the money to establish a holiday savings account for your gift purchases this year. After all, this is an expense that you know you will have, so set aside a little each month starting now. Be sure to put this money in an account separate from your other savings.
    
4. Be good to your car and your home. Use your additional money to help out with costly, but necessary, maintenance and repairs to your home or vehicle. Replace that leaky roof or buy new tires for your car.
    
5. Invest in a retirement plan. Enhance your future now by using your money to invest in a tax-deferred retirement plan. If you have an Individual Retirement Account (IRA), boost your contribution amount. (Be sure you understand your annual contribution limits.) If you don’t have a retirement account, learn more about them.
    
6. Treat yourself. If you have all of the above covered, then it’s OK to reward yourself, but do so responsibly. Put your extra money toward a vacation or a flat-screen television. Just be sure to maintain your fiscally savvy ways by finding the best deal, and click here for tips on making a major purchase.